The Legal Sector Affinity Group (LSAG) has published a 2023 update to its AML guidance for regulated law firms.
The guidance is intended to help solicitors and law firms understand their legal obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
Failure to comply with AML regulation can result in professional conduct issues, including fines (and worse) from the SRA, and potentially criminal offences being committed.
LSAG Guidance 2023
The main bulk of the guidance covers a range of topics related to AML compliance (for those firms within scope of the Regulations), including:
- Risk assessments: Law firms are required to conduct a risk assessment to identify and assess the risk of money laundering and terrorist financing within their business. The firm-wide risk assessment is the cornerstone of AML compliance – everything else flows from it. The guidance provides information on how to conduct a risk assessment and what factors to consider. Individual clients and matters must also be risk assessed.
- Customer due diligence (CDD): Law firms must carry out CDD on their clients, which involves verifying the identity of the client and understanding the nature of their business. The guidance provides information on what information to collect and how to verify identities of individuals and beneficial owners.
- Suspicious activity reporting (SARs): Law firms are required to report any suspicious activity to the relevant authorities. The guidance provides information on what constitutes suspicious activity and how to make a SAR.
- Staff training: Law firms are required to ensure that their staff are trained on AML issues. The guidance provides information on what training should cover and how it should be delivered.
- Policies procedures and controls (PCPs): Firms must have effective AML policies and procedures in place and ensure that they are regularly reviewed and updated.
- Independent audit: Regulation 21 requires firms to consider auditing the effectiveness of their AML controls. The regulators expect ‘most firms’ to have commissioned an independent AML audit.
Why the LSAG update?
The updated guidance, which has received approval from HM Treasury, reflects changes to the underlying Regulation. Of particular note:
- The discrepancy reporting requirement has been significantly restricted. From April 1, 2023, the obligation to notify inconsistencies to company registries will only be applicable in the following situations:
- The establishment of a business relationship is with a company, a limited liability partnership, a Scottish partnership, a trust that requires registration with HMRC’s trust registry, or an overseas entity that needs to register due to the ownership of UK real property;
- The inconsistency is considered “material” and not a mere typing error or minor spelling mistake; and
- The inconsistency can reasonably be perceived, based on its nature and all relevant circumstances, as linked to money laundering or terrorist financing, or aimed at concealing information about the customer’s business.
- There is a new ‘anti-proliferation financing’ duty. Proliferation financing refers to the provision of financial services or support that facilitates the proliferation of weapons of mass destruction (WMDs) or their delivery systems.
This type of financing can be used by individuals or entities involved in terrorism or organised crime.
The updated LSAG guidance highlights that law firms are vulnerable to being used for proliferation financing due to their involvement in financial transactions related to mergers and acquisitions, capital raising, and other business activities. The risks can also arise when providing legal advice and assistance to clients in high-risk jurisdictions or sectors.
To mitigate the risks of proliferation financing, law firms should adopt appropriate policies and procedures to identify and manage the risks. These policies should include conducting enhanced due diligence on clients and transactions that are considered high-risk, as well as training staff on the risks of proliferation financing and the relevant legal and regulatory requirements.